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Lawsuit Could Undo Sale That Created New GM

The new General Motors Co. (GM) could be
undone by a lawsuit that pits general creditors against hedge
funds including Elliott Management Corp. and Fortress Investment
Group LLC (FIG) over $3 billion, the car company said in a lawsuit
that went to trial today.

A trust for creditors of the old, bankrupt part of the
auto-maker now known as Motors Liquidation Co. sued the hedge
funds in Manhattan bankruptcy court in March, alleging that
while GM was preparing its bankruptcy filing on June 1, 2009,
four hedge funds, which held notes in a Canadian unit of GM,
“saw an eleventh-hour opportunity for profit and pounced.”

The trust seeks to have a $2.67 billion claim and a $367
million payment negotiated for holders of notes in GM’s Nova
Scotia unit disallowed or reduced, saying the hedge funds seek
more than three times what General Motors actually owed them.
The amounts, agreed to as part of a settlement known as the
“Lock-Up Agreement” resolved a dispute the hedge funds had
brought over an intercompany claim GM’s Nova Scotia Finance unit
had against GM Canada.

General Motors, the currently operating auto-maker which
split off from the bankrupt unit through a purchase of its
assets July 10, said the trust’s objections “threaten to
disturb” the sale that saved the U.S. auto-maker, allowing it
to prosper.

Preserve Order

“New GM intends to participate in the trial of the claims
objection to the extent required to protect and preserve the
sale order,” lawyers for the company wrote. The company said
that if the lawsuit undoes the lock-up agreement, it could spawn
new lawsuits, and create a “chaotic situation” for GM Canada,
as well as all creditors, who are being repaid through warrants
to buy stock in the new company.

The trial before U.S. Bankruptcy Judge Robert Gerber in
Manhattan will partly revolve around whether the lock-up
agreement was finalized before GM’s 7:57 am petition.

The notes at issue, 8.375 percent notes due 2015 and 8.875
percent notes due 2023, recently traded at 43.9 cents and 43.8
cents on the dollar, respectively, according to Trace, the bond
price reporting system of the Financial Regulatory Authority.

Maximum Advantage

The trust says four hedge funds, pushing for maximum
advantage as they negotiated through dawn in the offices of Weil
Gotshal Manges LLP, an adviser to GM’s Canadian subsidiaries,
didn’t finish the agreement until 9:21 am on June 1.
Furthermore, a precondition of the agreement — the consent of
two-thirds of the note-holders — wasn’t obtained until June
25, more than three weeks later, the trust said it will show at
trial.

The two other funds, Appaloosa Management LP and Aurelius
Capital Management LP have sold their notes and no longer have a
claim in the case. Morgan Stanley (MS) Co International Plc, a unit
of Morgan Stanley, has joined Fortress and Elliott in court
papers arguing against the trust’s lawsuit.

Since the agreement wasn’t completed until after General
Motors actually filed for bankruptcy protection, it requires
bankruptcy court approval, which was never obtained, the trust
said, adding that the hedge funds misrepresented the agreement
as ending before the bankruptcy in order to evade court
scrutiny.

Pure Fabrication

In a pretrial brief, the noteholders said the allegations
“have always been a pure fabrication” and that they negotiated
at General Motors’ request for the benefit of all holders of
notes in the Nova Scotia unit to satisfy an intercompany loan
that would have also bankrupted its Canadian unit. The agreement
satisfied the loan “at a substantial discount” and the
settlement was approved by the U.S. and Canadian governments in
the early morning of June 1, the hedge funds said.

The trial began today with no opening arguments. A trustee
for the Canadian unit, Peter Wedlake, testified before Gerber
that he had the authority to examine aspects of General Motors’
Nova Scotia Finance Co., but did not.

The trust has said the hedge funds “hand-picked” Wedlake,
who they had worked with on investment schemes before, to be a
trustee for the Nova Scotia notes and had already worked with
him on a lawsuit against the Nova Scotia unit and some of its
officers and directors.

Consent Fee

After getting the $367 million “consent” fee, the
noteholders waited until just over 90 days before petitioning
for the Nova Scotia unit’s bankruptcy, Wedlake testified. Under
bankruptcy law, sums transferred out of an estate before 90 days
prior to a bankruptcy filing can more easily be clawed back for
sharing among all creditors.

General Motors said the agreement was important for it
because it resolved the dispute over intercompany loans and
allowed the U.S. and Canadian governments to buy GM Canada
without creating a separate bankruptcy for it. Without the
ability to do that, the company would have immediately
liquidated, giving creditors of the old GM nothing, lawyers for
the auto-maker said in court papers.

“The Governments (especially the governments of Canada and
Ontario) wanted New GM to acquire GM Canada as part of the 363
sale without having to file GM Canada,” lawyers for GM wrote in
court papers. In order to do so, GM Canada needed to
“compromise” the intercompany loans GM Canada owed to the Nova
Scotia unit.

If any changes were made to the documents after the
bankruptcy petition was filed it was to “clean up a scrivener’s
error,” GM said in court papers.

Forgiven Claim

Paulson Co. funds, also investors in the two tranches of
Nova Scotia notes, said in court papers that as part of the
settlement, the noteholders “gave up a lot in return”
including the intercompany claim, worth $1.334 billion, which
was forgiven under the agreement.

Before the lock-UNNp agreement, the face amount of the claims
held by the notes was less than $1 billion, the trust has said
in court papers.

Gerber’s wind-down order in 2011 sealed the government-
backed separation of the automaker’s liabilities from its most
profitable operations, which took place in 2009. Motors
Liquidation Co.’s plan repays general unsecured creditors
through a trust. The trust is set up to pay general unsecured
creditors through receive stock and two series of warrants, one
with an exercise price of $10 a share that expires in July 2016,
and another with an exercise price of $18.33 a share that
expires July 2019, according to court papers.

The main bankruptcy case is In re Motors Liquidation Co.,
09-50026, U.S. Bankruptcy Court, Southern District of New York
(Manhattan). The adversary case is Motors Liquidation Company
GUC Trust v Appaloosa Investment Limited Partnership I, 12-
09802, U.S. Bankruptcy Court, Southern District of New York
(Manhattan).

To contact the reporter on this story:
Tiffany Kary in New York bankruptcy court at
1459 or tkary@bloomberg.net

To contact the editor responsible for this story:
John Pickering at
jpickering@bloomberg.net

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